The European Commission's autumn forecast foresees a continuation of the economic recovery currently underway in the EU. GDP is projected to grow by around 1¾% in 2010-11 and by around 2% in 2012. A better than expected performance so far this year underpins the significant upward revision to annual growth in 2010 compared to the spring forecast. However, amid a softening global environment and the onset of fiscal consolidation, activity is expected to moderate towards the end of the year and in 2011, but to pick up again in 2012 on the back of strengthening private demand. With the economic recovery taking hold in the EU, labour-market conditions are expected to slowly improve over the forecast horizon, as is the budgetary situation. The unemployment rate is projected to fall to around 9% in 2012, with the public deficit declining to about 4¼% of GDP. Developments across Member States are nevertheless set to remain uneven.

European Commissioner for Economic and Monetary Affairs, Olli Rehn said: "The economic recovery has taken hold. I am encouraged by the prospect that employment is finally set to improve next year in Europe. Public deficits are starting to decline thanks to the consolidation measures taken and to the resumption of growth. However, this recovery is uneven, and many Member States are going through a difficult period of adjustment. A determined continuation of fiscal consolidation and frontloaded policies to enhance growth, are essential to set the sound basis for sustainable growth and jobs. The turbulence in sovereign debt markets underlines the need for robust policy action."

Broadly favourable developments so far

In line with the characteristics of previous recoveries following financial crises, the current upturn is proving rather muted overall. That said, the economic situation in the EU has significantly brightened of late, with GDP growth in 2010 so far exceeding expectations, especially in the second quarter. The recovery also appears to be broadening out. While export growth – the first stage of the traditional recovery pattern – has been solid for some time, the EU economy is now entering the next phase - whereby the pick-up in exports starts to spur (equipment) investment demand.

A gradual and uneven recovery

With the projected slowdown in global activity dampening export growth and temporary supports running their course, near-term prospects for the EU economy appear more subdued. The contribution of net exports to GDP growth is set to diminish over the forecast horizon; whereas the contribution of domestic demand is set to increase, owing to a gradual firming of investment and private consumption growth. On the investment front, improvements in the capacity utilisation rate and the profit situation of firms are among the factors expected to support growth, while ongoing balance-sheet adjustment and fiscal consolidation are set to act as constraints. As for private consumption, a slowly improving employment outlook, moderate income growth and subdued inflation underlie the projected pick-up, though consolidation and deleveraging on the part of households are set to have a dampening effect here too.

While the recovery is becoming increasingly self-sustaining at the aggregate level, progress across Member States remains uneven, with the recovery set to continue advancing at a relatively fast pace in some, but to lag behind in others. This reflects differences in the scale of adjustment challenges across economies and ongoing rebalancing within the EU and euro area.

Labour-market conditions and public finances start to improve

Developments in the labour market typically lag those in GDP by half a year or more. In keeping with this pattern, recent months have seen labour-market conditions start to stabilise in the EU, with a modest improvement expected over the forecast horizon. Employment growth of almost ½% and around ¾% is expected in 2011 and 2012 respectively, while the unemployment rate is projected to gradually fall, from some 9½% this year to about 9% by 2012. Overall conditions are set to remain weak though, reflecting, inter alia, the unwinding of policy measures taken in response to the recession and ongoing structural adjustment, not least in the public sector.

Some improvement is also evident on the fiscal side, with around half of EU Member States set to post a lower general government deficit this year than in 2009. As stimulus measures come to an end and the consolidation phase increasingly takes hold, the deficit is projected to fall in 24 Member States next year. For the EU as a whole, a deficit of slightly above 5% of GDP is expected in 2011, with a further decline of about 1 percentage point in 2012 as the recovery gains ground. The debt ratio, however, is set to remain on an upward path over the forecast horizon.

Inflation remains subdued

Relatively subdued consumer-price inflation is in sight in both the EU and euro area over the coming period. HICP inflation is projected to average 2% in the EU this year and next, easing to around 1¾% in 2012 (for the euro area, a rate of 1¾% is expected in 2011-12). The remaining slack in the economy, along with fairly moderate wage and unit-labour cost growth are expected to keep inflation in check going forward, notwithstanding slightly higher commodity prices and increases in indirect taxation and administered prices in some Member States.

High uncertainty, but broadly balanced risks

With uncertainty still high, risks to the EU growth outlook are not-negligible, though they appear broadly balanced. On the upside, the rebalancing of GDP growth towards domestic demand, and the spill-over from the pick-up in activity in Germany to other Member States, may materialise to a greater extent than currently envisaged. Policy measures to tackle high deficits and debt may also prove more effective than assumed in dissipating market concerns, as well as in boosting confidence among business and consumers. On the downside, the financial-market situation remains a concern, with further tensions possible, as highlighted by the reappearance of stress in sovereign-bond markets lately. Moreover, softer than projected external demand cannot be ruled out, while fiscal consolidation could weigh more on domestic demand in the countries concerned than expected. Risks to the inflation outlook are also broadly balanced.